Joseph Economy is experiencing a budget deficit of $150 billion. The economy is operating $300 billion above its potential GDP, and the marginal tax rate is 25%. What are the structural deficit and the cyclical deficit?
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- Assuming a 1-year, money market account investment at 5.38 percent (APY), a 3.1% inflation rate, a 35 percent marginal tax bracket, and a constant $30,000 balance, calculate the after-tax rate of return, the realreturn, and the total monetary return. What are the implications of this result for cash management decisions? Assuming a 1-year, money market account investment at 5.38% (APY), a 35% marginal tax bracket, and a constant $30,000 balance the after-tax rate of return is? Assuming a 1-year, money market account investment at 5.38% (APY), a 35% marginal tax bracket, and a constant $30,000 balance the after-tax monetary return is? Given an after-tax return of 3.50% and an inflation rate of 3.1% theafter-tax real return is? Given an after-tax return of 3.50% and an inflation rate of 3.1% the after-tax real monetary return is?The Scenarios: You work in the macroeconomic research department of an investment bank. Based on your modelling of the economy, you think that in the next few months US GDP will evolve according to three basic scenarios: Scenario A: GDP will rise 3%. This will send the S&P ETF to 414. Scenario B: GDP will stagnate. S&P ETF will stay at 407. Scenario C: GDP will fall 2%. This will send the S&P ETF to 400. Question Compute the payoff and net payoff in the three scenarios above of a strategy made of two legs: Leg 1: a long straddle with maturity in February and strike 407. Leg 2: a short straddle with maturity in March and strike 407. Use the data in Table 2. Discuss why an investor might be interested in trading this strategy. What is the investor betting on?Assuming a 1-year, money market account investment at 2.51 percent (APY), a 1.1% inflation rate, a 25 percent marginal tax bracket, and a constant $40,000 balance, calculate the after-tax rate of return, the real return, and the total monetary return. What are the implications of this result for cash management decisions?
- According to the quantity theory of money, if the longminusrun economic growth rate is 3.6%, by how much should the Fed increase the money supply if it wants inflation to be 3%?DomesticSuppose the required reserve ratio is 14.25%. The simple money multiplier will be approximately __________ and the new $16,000 bill produced by the Federal Reserve can eventually lead to __________ in new money. A. 7.0175 / $112,280.70 B. 7.0175 / $162,810.22 C. 7.1250 / $112,280.70 D. 7.1250 / $162,810.22
- Suppose a project financed via an issue of debt requires five annual interest payments of $8 million each year. If the tax rate is 21% and the cost of debt is 5%, what is the value of the interest rate tax shield?You are interested in an investment project that costs $40,000 initially. The investment has a 5-year horizon and promises future end-of-year cash inflows of $12,000, $12,500, $11,500, $9,000, and $8,500, Your current opportunity cost is 6.50% per year. However, the Fed has stated that inflation may rise by 1.5% or may fall by the same amount over the next 5 years. Assume a direct positive impact of inflation on the prevailing rates (Fisher effect) and answer the following questions: (Assume that inflation has an impact on the opportunity cost, but that cash flows are contractually fixed and are not affected by inflation.) a. What is the net present value (NPV) of the investment under the current required rate of return? b. What is the net present value (NPV) of the investment under a period of rising inflation? c. What is the net present value (NPV) of the investment under a period of falling inflation? d. From your answers in (a), (b), and (c), what…Use the Taylor Rule to predict the Fed’s target for the Federal funds rate in the following situations: (LO4) a. Inflation is 3%, which is 1% above the target; output growth is 4%, which is 1% above potential. b. Inflation is 2%, which is the target rate; output growth is 4%, which is 1% above potential. c. Inflation is 1%, which is 1% below the target; output growth is 2%, which is 1% below potential.
- 1. A) What are disadvantages of Payback Period method used in capital budgeting? B) A project has an initial cost of $1000 and $450 cash inflow each year for 4 years with a discount rate of 10%. What is its payback period? What is its discounted payback period?Assume that the Liquidity Preference Theory of the term structure is correct and that you expect the annual real rate of return to be constant over at least the next 10 years at 1.50 percent, that you expect average annual inflation to be 1.0 percent each year for the next 2 years (Years 1-2), but then, because of government spending and the effect of the federal stimulus package and health care, to jump to 6.0 percent for years 3 - 7, but to then settle down to a lower, constant rate in all later years. Also assume that the maturity risk premium can be defined as (0.20%) *(t-1) and that the yield on a 10-year corporate security is 9.80 percent, which includes a liquidity premium of 0.65 percent and a default risk premium of 1.75 percent. Given this information, determine the average annual return on a 5-year corporate security to be bought at the end of Year 3 (beginning of Year 4) and held over Years 4, 5, 6, 7 and 8, if the liquidity premium on this security will be 0.10 percent and…The federal government is considering an investment that would cost $25 billion in construction costs today (this year), but would reduce spending by $2 billion in each of the next 15 years. Suppose future values are discounted at a rate of 4 percent. a. What is the present value of the $2 billion annual savings from the project? b. should the government finance this project? Briefly explain.
